Tips and strategies Apr 13, 2016 8 min read

Dynamic Pricing: The Art and Black Magic of Situational Pricing

by Dan Virgillito

Image via ReynerMedia

There’s nothing better than haggling in a Sicily flea market.

In fact, in this part of Italy, not haggling is rather considered unacceptable, a sign of arrogance, or even an insult.

Being a Sicilian, I learned to haggle in my younger days. Watching vendors quote low as my grandma dragged me away from stalls taught me about the availability of “better deals."

Aware of the opportunity, I started conducting experiments when I visited these markets alone. For instance, when I saw an item of interest, I walked up to the stall, asked the price, and then walked away, pretending that it was merely something that caught my eye briefly. Just with this act I made hundreds of vendors say “how much do you want to pay?”

And that’s how I really learned to “play” with the street vendors in later years.

In communities where the village marketplace of days-gone-by is still the norm, and where prices are determined on-the-spot, a savvy merchant needs to be able to size up his patrons as they walk by.

When someone approaches his booth and the haggling begins, he uses these observations to figure out how to get the best price for his goods.

In the retail world, on the other hand, we are accustomed to a universal one-price-for-all style of marketing. We can’t imagine paying a different price for an item—let’s say a DVD or a Swingline Stapler—than the customer right in front of us.

But history has a strange way of moving in circles, and the days of static pricing may die out as the market returns to the more fluid and more ancient model.

In ecommerce this model is called dynamic pricing, and in 2016 it just might come of age.

If you aren’t familiar with dynamic pricing, it was first popularized by the airline industry. Ticket prices would fluctuate depending on various factors including mostly the date of purchase combined with the date of the flight itself.

Today it isn’t unusual for two passengers sitting right next to each other on a flight to be holding tickets with different price tags.

How are things evolving for ecommerce businesses? Let’s find out.

The Emergence of Dynamic Pricing in Ecommerce

The dynamic pricing practice has become so common in the transportation and hospitality industries that we now take it as a given. In other industries, however, this pricing strategy has not historically been so well received.

This is unfortunate because dynamic pricing doesn’t have to work against the customer, because it isn’t always about making the most profit from each transaction.

We’ll explain why in a minute, but first let’s take a look at the different forms of dynamic pricing. There are quite a few varieties, but here are four common techniques:

Depending on the industry, the pricing strategy will vary. Disney, for example, makes frequent use of peak pricing. Airlines use peak pricing in combination with time of purchase.

With the flexibility of online retail, however, the possible strategic combinations become almost endless.

The Power of Flexibility

Static vs. dynamic pricing really boils down to a question of price points. With static pricing, you have one price and that remains the price until you recalculate it manually or adopt a new pricing scheme across the board.

Dynamic pricing changes this picture entirely. Essentially, it means multiple price points instead of one.

Image via: WISER

And by “multiple” we mean as many as you need.

This kind of pricing flexibility results in prices that can be responsive to a variety of market conditions, and this is good for you and your customers.

To understand what this means for ecommerce, we need to address the 800 pound gorilla in the room; Amazon.

Case Study #1: Amazon’s Sliding Prices

Back in 2000, Amazon began performing tests with dynamic pricing. These tests weren’t applied across the board, but focused on specific products, namely DVDs.

The sliding DVD prices reportedly affected over half of the company’s top-100 best-sellers. Depending on the item, prices could vary as much as $15 from one customer to the next.

Customer anger was the result, partly because this test came only four months after a similar experiment Amazon had conducted on a popular MP3 player. Customers who paid the higher price felt hoodwinked, and they weren’t pleased.

So what criteria was Amazon using to “size up” its customers on the fly? We can’t say exactly, but some of the techniques used by other retailers are suggestive.

A WSJ report on Staples found that two customers would often be shown different prices based on their zip codes. If they were near competitor brick-and-mortar outlets, such as OfficeMax or Office Depot, a discounted price was shown to the customer.

Amazon’s pricing optimization engine is obviously more complex than mere geo-targeting. That much is clear from the constant fluctuations in pricing for a single product and for a single customer over a period of time.

Most Amazon customers who leave items in their cart for days will eventually see a notification about price fluctuations for those items..

Take advantage of the tools at CamelCamelCamel to see this for yourself.

Want to know if you’re getting the best price on a PNY 128 GB Memory Card? Here’s the chart we came up with:

Image via: CAMELCAMELCAMEL

Case Study #2: Uber’s Surge Pricing

Uber, a platform that connects independent drivers to nearby riders, is a more recent example of dynamic pricing innovation.

Uber operates in a highly fluid market. The demand for rides each day sees huge fluctuations while the number of available drivers is an unknown, since drivers (“driver-partners”) are free to work whenever they want.

In this sort of context, dynamic pricing is essential in order for the model to work.

If prices are too low, driver-partners won’t be incentivized to drive. If prices get too high, customers won’t use the service. Uber had to develop a way to close the gap between supply and demand under these chaotic conditions.

To achieve this, Uber came up with its “Surge Pricing” algorithm, and it has worked wonders.

That isn’t to say that things have gone off without a hitch. In 2014, during a hostage crisis at a café in Sydney, Uber prices for rides out of the area jumped to $100, four times the $25 minimum. As you can imagine, the general reaction was one of disgust. Uber released a tweet to explain the good intentions behind the mechanism:

In its efforts to build a positive reputation in the public eye, Uber has designed its system to inform the customer when Surge Pricing is in effect, so that, as far as is possible, the company can avoid any sense of foul play:

Image via: LEN MUSIELAK

The customer then understands what he or she is paying for and why, so that they can appreciate the service they are paying for.

A more in-depth analysis of Surge Pricing can be found by checking out one of the many case studies available on the subject.

Working Around the System

At this point, you’re probably curious about whether or not the retailers you shop with are using dynamic pricing. Here are a few measures you can take to find out:

1. Change Your User Agent

Every browser has a “user agent” setting that it uses to identify itself to web servers. This tool conveys information about the device being used and aids in the proper delivery and display of content.

Most browsers give you the ability to override this setting. In Chrome, for example, you can bring up the Developer Tools screen and enter “device mode.” This will allow you to alternate between different agents and check the results.

2. Change Devices

Another option, and a simpler one, is to check pricing on a different device. If you are browsing on a PC and have access to a Mac, check prices on both.

Since Mac users are known to have a higher average household income than PC users, some retailers have exploited this difference to vary pricing.

3. Change Your Zip Code

If you are browsing a site that asks you to enter your zip code so that it can find your “Ship to” store (to pull up prices related to that region), then just change your setting to a different location.

4. Shop Around

Find some alternate sources like Google Channel and compare. This won’t always indicate dynamic pricing, but it can help.

5. Change Your IP Address

Using a proxy server or a VPN, you can alter your IP address. This is a bit random in its effect, but is an interesting tactic nonetheless.

Benefits for Customers

If this is the first you’ve heard of dynamic pricing, it might appear to be nothing more than an underhanded way to make an extra buck. In reality, this approach has a wide variety of uses and they can each work as much for customers as they can for businesses.

Disney, for example, has been talking about its use of peak pricing for theme park ticket sales. Is this an example of profiteering, or is it something else?

If Yelp reviews can be treated as representative samples of customer satisfaction, it’s clear that customer complaints about overcrowding are just as common as those about high pricing.

When asked, Walt Disney Parks and Resorts Chairman Bob Chapek said: “We have to look at ways to spread out our attendance throughout the year so we can accommodate demand and avoid bursting at the seams.”

According to Robert Niles of Theme Park Insider:

“Every time Disneyland raises its ticket prices, reporters ask if those higher prices will drive away fans. [But] Disneyland's attendance keeps going up — year after year, price increase after price increase. So forgive me for not holding my breath, waiting for a fan revolt against Disney's latest price increase.”

Dynamic pricing for Disney may mean a hike in price, but that hike may also lead to greater customer satisfaction overall.

What’s Driving the Change?

Wal-Mart changes its prices about 50,000 times per month for a number of reasons such as competition, traffic, time of year, and inventory.

But it’s also representative of the way customers shop and the data they have at their fingertips:

Image via: WISER

While it seems like a customer service tool, the free WiFi actually serves as a proxy that determines how many smartphone users are in the physical store. Also, by being the router, it can monitor traffic, enabling retailers to see if those price comparison apps are in use. That can greatly influence how you price in-store.

Dynamic pricing may become an industry necessity because the big guys are doing it, but the big guys are doing it in response to changes in the way customers shop.

How to Take Your Pricing to the Next Level

Titans like Amazon and Wal-Mart can develop proprietary price management engines for their enterprises.

But that’s about to change. Here are a few suggested steps to help you ride the wave:

1. Choose Your Solution

Solutions fall into three categories:

packaged software
proprietary software
cloud or SaaS solutions

SaaS is the most popular because it allows retailers to access powerful data management software without blowing their budget.

Third-party pricing intelligence services like Wiser, Digonex, and PROS are cropping up to make dynamic pricing available to companies that aren’t loss leader giants, essentially leveling the playing field and allowing you to stay competitive.

2. Get Your Data Right

In this environment, you have to prioritize.

According to an RIS survey, businesses listed the following as the most important elements in determining prices dynamically:

Image via: WISER

As you can see, it’s not just turning a higher profit that would influence a dynamic pricing strategy. Factors such as gaining market share within a geographic location, inventory management, and need to move product more quickly through a specific channel can all make a significant impact.

3. Test

What works for others may not work for you, and a variety of factors will come into play when determining optimal price: brand value, shipping cost, reputation, etc.

This is where A/B testing becomes key, allowing you to analyze the impact of your dynamic pricing strategy on sales, conversion rates, and your bottom line.

Shopify and Your Dynamic Pricing Potential

Shopify leaves the door wide open when it comes to your dynamic pricing strategy. You can browse the app store for some great solutions, depending on your needs.

Darwin Pricing unlocks the potential for geo-targeted sales. Many of the popular third-party solutions, such as Wiser and PerfectPrice are ready for full Shopify integration.

Dynamic pricing might soon be one of the only constants in ecommerce. And even though the old “retail price tag”-style of pricing may be going extinct, your business doesn’t have to.